Crônicas do Brasil: The “Real” Deal

Tudo bem, Stanford? I write to you from Brazil, where I have spent the past seven weeks working for a commercial real estate company in São Paulo.

Before the Brazilian winter ends, I intend to write a couple posts about my observations and experiences here. The first will give some timely updates on the state of Brazil’s economy, with a focus on what I have noticed in person. In a later post or multiple posts, I shall address Brazilian culture, the Portuguese language, and some overall takeaways from my time in Sampa. All questions and comments are welcome.

Robust Economy

São Paulo (SP) is unquestionably booming. Lots of construction–particularly of high-rises and large shopping malls–and a flourishing nightlife indicate the city’s increasing wealth. SP is a car-centric city; even the poorest households in the C segment favelas will have a car. Every gas station provides ethanol. As in the U.S., credit cards are accepted at almost every place where you could conceivably spend money, except at some cheaper restaurants. Unlike the U.S., nearly every card transaction is conducted with a portable point-of-sale, separate from a computer or centralized system, which frequently makes the transactions faster.

Furthermore, Brazil’s unemployment rate just went from 6.4% to 6.2%. Residents of SP work as hard and long as New Yorkers, and they have a strong sense of national pride and Brazil’s increasing importance in the world.

Growing Pains

There are also some growing pains. The internet in SP is slow, even slower than when I was in Peru last summer. Crime and drug use remain major concerns. Driving is arguably more dangerous than in NYC due to SP’s aggressive motorcyclists, the presence of whom is largely due to heavy traffic. Public transportation is dismal at best. There are some transit lanes for buses, but the system suffers from delays and the metro does not serve large swaths of the city.

A duplex in Itaim Bibi, where many of the city's nouveau riche are snapping up swanky new apartments.

Although SP generally has good roads, the rest of Brazil suffers from badly insufficient infrastructure, and even here the country’s geographical challenges appear daunting. There are only two main highways and one main railway from SP to the coast, each of which descends 800 meters down a steep mountain range. The trip is spectacular, but not if you are a trucker. On the other side is Latin America’s largest port, Santos, which already operates at above capacity.

SP’s wealthy live in either fortress-like houses or more frequently highly guarded apartment buildings, since the former are seen as more susceptible to robbery (though apartment buildings are more lucrative targets). In general, there is simply less law and order, even in the best parts of the city. Although Brazilians appear less racially prejudiced than Americans, race remains split along class lines. Whites dominate businesses and the upper classes, whereas favela residents are mainly of mixed ethnicity.

Bureaucracy also makes Brazil a very hard place to start a business, even though I have met some Brazilian nationals creating start-ups. Government approval remains the biggest obstacle businesses face.

Finally, the costliness of the real (pronounced “hei-al”) has led to some results that might sound odd to Americans. McDonald’s, for instance, is viewed as an upscale dining option by many in the middle class, a special place to take one’s family once or twice a month (partly because Big Macs cost $6.16). Brazilians also love to visit Florida: for the warmth, for Disneyworld, and for the shopping in Miami, especially the “cheap” clothes. Although these habits might sound like charming oddities, they point to some weaknesses in Brazil’s domestic economy that are not so easily circumvented, such as the inability of Brazilian goods to compete at home, let alone abroad.

Warning Signs

A fruit/vegetable stand at a market in Guaianases, where the clients are predominately members of the newly-formed lower middle class.

I see no red flags, but a few warning signs. The role of Brazil’s national development bank BNDES in major corporate deals is troubling, particularly after the Pão de Açucar/Carrefour/Casino debacle and the less-observed but equally important Sadia/Perdigão merger under Brasil Foods. Credit is too expensive here without government subsidies or access to capital markets, and BNDES seems to be making the problem worse.

In addition, SP is becoming even more expensive than New York. Real estate prices and costs of living have soared in the past two years. Going out at night in SP, especially if you are gentleman, can cost between R$100-150 if you buy dinner and go to a bar, and then at least another R$100 if you decide to go clubbing. The real has lately been called the world’s most overvalued currency, yet demand shows little sign of abating. Vacancy rates remain low all across the city, more paulistas than ever are buying cars, and all around you can see new shops, supermarkets, malls, and restaurants. The $64,000 question is not how long will it last; the real question is, when Brazil hits harder times, will the country be ready?

What’s Next

The answer is probably not, though Brazil has some policy tools at its disposal. In the long run, steps like improving infrastructure, bolstering education, and streamlining populist government spending would do a great deal to expand Brazil’s capacity to grow without overheating. However, corruption is so rampant here that the government has very little credibility or incentive to take bold measures. Even the stadiums for the World Cup are drastically behind schedule and under-funded; at current rates, they will not be finished until 2038!

Given the importance of football to this country, I am fairly positive Brazil will find a way to get the stadiums ready. But if the larger problems remain unaddressed, Brazil’s development will likely include fits and starts, more struggles with inflation, and a potentially drastic correction down the road.

Hey George,
It was really cool to read your thoughts on another country (and especially Brazil – I love Brazilian music and the language and hope to spend time there sometime soon). I wrote similar posts on my own blog when I was living in Argentina and Uruguay during my year off. But you definitely bring a Stanford (econ, poli sci) lens to it which my posts lacked. Next time I go abroad I’m hoping I’ll be able to bring that perspective too!

Chris, thanks a lot for your feedback. Hope you can make it to Brazil in the near future. When you get a chance, could you possibly post a link to your blog? I would love to check out what you wrote while you were abroad.

George

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